The Importance of Ignoring the Noise of the Market

Last week was uncomfortable for market watchers. The Dow dropped more than 200 points one day and surged more than 200 the next. Both moves were attributed to small, seemingly random things. The International Monetary Fund cut its global forecast, and the Federal Reserve released its meeting minutes. I’ll leave it to you to figure out which one caused the drop and which one the surge.

It’s interesting to watch as people rush about in shock that the markets decided to act like markets. Instead of a slow, but steady, upward increase, they’ve been all over the place. Once again, we’re seeing words like “volatility” pop up, as though it’s a new concept.

And like a bunch of tarot card readers, investors are trying to read the signs and determine what comes next. But it’s left me wondering: Why are people so surprised? Markets, by design, tend to go up and down without warning.

Of course, it’s led to some entertaining headlines and predictions. I think my favorite might be from the veteran trader Art Cashin, who told CNBC last week that “the S&P 500 index needs to stay above the 1,950 level to avoid further declines.”

After hearing that comment, a friend sent me his own explanation. Unless the market doesn’t go down, it will go down. If it stays up, it will not have gone down. Unless it goes down later, which will only happen if it doesn’t stay up.

Such precise predictions are a part of the noisy industry of forecasters and gurus that’s grown up around investing. Sometimes, they get it right, at least temporarily. The S&P 500 did indeed fall below 1,950 and is around 1,900 as of this writing. But it would only need a 3 percent gain to be back above that level again, which could happen in just a couple of days.

With all of this noise comes hundreds of opportunities to rethink the good financial decisions we’ve already made. It’s so tempting to latch on to these predictions and believe they mean something. But unless something fundamental has changed in our lives, these so-called opportunities actually represent a huge cognitive drain and present a danger to our financial health.

Luckily, we have a choice. We can assess our options, understand to the best of our current knowledge the potential consequences and choose what to do.

I made a decision more than 20 years ago not to drink alcohol. It’s a completely personal choice, but once I made the decision, that was it for me. If I took the time to rethink that decision every time I was offered a drink, it would make it that much harder to stick with the decision that still represents the best choice for me.

The same holds true for our financial decisions. Let’s say that you’ve decided to save $100 every week for your child’s education. Every week, you force yourself to write a check, find an envelope and take the time to mail it. If it’s a manual process, there will be multiple opportunities to rethink that good decision. It may not be long before you start skipping a week and then quit altogether.

That’s why you automate good behavior. In this case, you have the $100 automatically pulled out of your account every week and deposited in a separate account. By automating good, one-time decisions, you can avoid rethinking it.

The same holds true for how you invest. If you’ve made financial decisions that support your goals, you don’t need to keep looking for signs about how to react to what’s happening now. Just like avoiding alcohol or other changes you make in your life, you already have a pretty good idea of what you will or won’t do next.

Sure, you’re willing to adapt that plan and, say, rebalance your investments if things change. But that probably happens once or twice a year, not every day. Over all, you recognize that you gain extremely little by getting sucked into the hundreds of daily opportunities to change your mind. You’ve made your decision, and it’s still the best choice for you.

As odd as it may sound, the sooner you start treating your investments like you treat life, the happier you’ll be with the outcome. Some decisions can be made once. And choosing to behave when everyone else around you is not could be one of the best ones you’ll ever make.